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Automakers across the world are cutting down on vehicle production because of an acute shortage of semiconductors. Mint looks at the reasons for the short supply and its potential impact on the Indian carmakers in the coming months.

Why’s there a shortage of semiconductors?

The auto industry supply chain is a global one where components or spare parts are manufactured in one country and vehicles are assembled in another. Hence, auto-makers need to place orders for components in advance, according to their production schedules. Most carmakers reduced their orders for semiconductors as they expected a steep reduction in vehicle production because of the softening of demand following the covid outbreak. But the pandemic had a positive impact on car sales as people shunned public transport and ride-sharing services. And when demand picked up, chip makers failed to fulfil the orders.

Why are they so important?

Automobiles are now operated by software and electronic parts. From music systems to engines, semi-conductors help operate most parts of a modern vehicle. With automakers concentrating on offering vehicles with connected software and automatic trans-missions, the need for chips will increase. Globally, the shift towards electric vehicles (EVs) will make automakers more reliant on chip-sets. Carmakers in India have as yet not been as impacted as the ones in the US, Europe, Japan, or other developed markets as entry-level vehicles here do not have too many electronic parts. But with the shift to BS-VI norms, that is changing.

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Who are the major makers of semiconductors?

The industry is dominated by a handful of manufacturers such as Intel Inc., Nvidia Corp. and Qualcomm Technologies Inc. of the US, Samsung and SK Hynix of South Korea, and Taiwan Semiconductor Manufacturing Co. of Taiwan. Most of them are ramping up their production capacity. Carmakers, however, do not expect the situation to improve significantly this fiscal.

What’s the likely impact on automakers?

Suzuki Motor Corp. said production will be limited to one shift at its Gujarat factory, and it will suspend production on three days in August because of the shortage. Hyundai Motor India Ltd, Mahindra and Mahindra Ltd and others have been facing production constraints. In April, Daimler cut working hours for some staff and temporarily stopped production at some plants. BMW reduced output at its plants. Jaguar Land Rover Plc is looking at a negative operating margin and an operating cash out-flow of £1 billion for the second quarter.

How will this reflect on the recovery?

The disruption in production comes at a time when retail demand is gradually picking up after two months of lockdowns following an explosive rise in covid-19 cases from April. Vehicle inventory with dealers of leading carmakers is at a record low. Passenger vehicle makers are gearing up to increase inventory, expecting retail sales to pick up during the Onam to Diwali period. This year, good vehicle retail sales during the festive season could offset the loss in sales in the first quarter. But the chip shortage could affect offtake.

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